Economy of the Republic of Ireland
The economy of Ireland is a highly developed knowledge economy, focused on services in high-tech, life sciences, financial services and agribusiness, including agrifood. Ireland is an open economy, and ranks first for high-value foreign direct investment flows. In the global GDP per capita tables, Ireland ranks 2nd of 192 in the IMF table and 4th of 187 in the World Bank ranking.
Social expenditure stood at roughly 13.4% of GDP in 2024. Following a period of continuous growth at an annual level from 1984 to 2007, the post-2008 Irish economic downturn severely affected the economy, compounding domestic economic problems related to the collapse of the Irish property bubble. Ireland first experienced a short technical recession from Q2-Q3 2007, followed by a recession from Q1 2008 – Q4 2009.
After a year with stagnant economic activity in 2010, the Irish real GDP rose by 2.2% in 2011 and 0.2% in 2012. This growth was mainly driven by improvements in the export sector. The European sovereign-debt crisis caused a new Irish recession to start in Q3 2012, which was still ongoing as of Q2 2013. By mid-2013, the European Commission's economic forecast for Ireland predicted its growth rates would return to a positive 1.1% in 2013 and 2.2% in 2014. An inflated 2015 GDP growth of 26.3% was officially partially ascribed to tax inversion practices by multinationals switching domiciles. This growth in GDP, dubbed "leprechaun economics" by American economist Paul Krugman, was shown to be driven by Apple Inc.'s restructuring of its Irish subsidiary in January 2015. The distortion of Ireland's economic statistics by the tax practices of some multinationals, led the Central Bank of Ireland to propose an alternative measure to more accurately reflect the true state of the economy from that year onwards.
Foreign-owned multinationals continue to contribute significantly to Ireland's economy, making up 14 of the top 20 Irish firms, employing 23% of the private sector labour-force, and paying 80% of the collected corporation tax.
Economic contributors and measures
Foreign-owned multinationals make up a significant percentage of Ireland's GDP. The "multinational tax schemes" used by some of these multinational firms contribute to a distortion in Ireland's economic statistics; including GNI, GNP and GDP. For example, the Organisation for Economic Co-operation and Development shows Ireland with average leverage on a gross public debt-to-GDP basis, but with the second highest leverage on a gross public debt-per capita basis. This disconnect led to the 2017 development by the Central Bank of Ireland of Irish modified GNI for measuring the Irish economy. Ireland's GNI* per capita ranks it similar to Germany. According to an OECD report, productivity growth among foreign owned entities averaged 10.9% for 2017 and was a lower 2.5% for indigenous firms.The distortion of Irish economic data by US multinational tax schemes was a key contributor to the build-up of leverage in the Celtic Tiger, amplifying both Irish consumer optimism, and global capital markets optimism about Ireland. Global capital markets, who ignored Ireland's private sector credit, and OECD/IMF warnings, when Irish GDP was rising during the Celtic Tiger, retracted during the post-2008 Irish economic downturn, leading to a deep decline in Irish property values.
A particularly dramatic growth in Ireland's 2015 GDP was shown to be largely driven by Apple restructuring their double Irish subsidiary, ASI, in January 2015. A follow-up EU Commission report into Ireland's national accounts showed that even before this, 23% of Ireland's GDP was multinational net royalty payments, implying Irish GDP was inflated to 130% of "true" GDP. This led to the Central Bank of Ireland proposing a new replacement metric, modified gross national income, to better represent the "true" Irish economy.
Given the importance of US multinationals to Ireland's economy, the passing of the Tax Cuts and Jobs Act of 2017 is a challenge to Ireland. Parts of the US TCJA are targeted at Irish multinational tax schemes, especially the move to a modern "territorial tax" system, the introduction of a lower FDII tax on intellectual property, and the counter-Irish GILTI tax regime. Additionally, the EU's proposed Digital Sales Tax and stated desire for a Common Consolidated Corporate Tax Base, is also seen as an attempt to restrict the use of the Irish multinational tax schemes by US technology firms.
The stabilisation of the Irish credit bubble required a large transfer of debt from the private sector balance sheet, to the public sector balance sheet, via Irish bank bailouts and public deficit spending. The transfer of this debt means that Ireland, in 2017, had one of the highest levels of both public sector indebtedness, and private sector indebtedness, in the EU-28/OECD.
History
Since the Irish Free State
From the 1920s, Ireland had high trade barriers such as high tariffs, particularly during the Economic War with Britain in the 1930s, and a policy of import substitution. During the 1950s, 400,000 people emigrated from Ireland. It became increasingly clear that economic nationalism was unsustainable. While other European countries enjoyed fast growth, Ireland suffered economic stagnation. The policy changes were drawn together in Economic Development, an official paper by T. K. Whitaker published in 1958 that advocated free trade, foreign investment, and growth rather than fiscal restraint as the prime objective of economic management.In the 1970s, the population increased by 15% and national income increased at an annual rate of about 4%. Employment increased by around 1% per year, but the state sector amounted to a large part of that. Public sector employment was a third of the total workforce by 1980. Budget deficits and public debt increased, leading to the crisis in the 1980s. During the 1980s, underlying economic problems became pronounced. Middle income workers were taxed 60% of their marginal income, unemployment had risen to 20%, annual overseas emigration reached over 1% of population, and public deficits reached 15% of GDP.
In 1987, Fianna Fáil reduced public spending, cut taxes, and promoted competition. Ryanair used Ireland's deregulated aviation market and helped European regulators to see benefits of competition in transport markets. Intel invested in 1989 and was followed by a number of technology companies such as Microsoft and Google. A consensus exists among all government parties about the sustained economic growth.
Between 1985 and 2002, private sector jobs increased 59%. The economy shifted from an agriculture to a knowledge economy, focusing on services and high-tech industries. Economic growth averaged 10% from 1995 to 2000, and 7% from 2001 to 2004. Industry, which accounts for 46% of GDP and about 80% of exports, has replaced agriculture as the country's leading sector.
Celtic Tiger (1995–2007)
Historian R. F. Foster argues the cause was a combination of a new sense of initiative and the entry of American corporations such as Intel. He concludes the chief factors were low taxation, pro-business regulatory policies, and a young, tech-savvy workforce. For many multinationals the decision to do business in Ireland was made easier still by generous incentives from the Industrial Development Authority. In addition European Union membership was helpful, giving the country lucrative access to markets that it had previously reached only through the United Kingdom, and pumping huge subsidies and investment capital into the Irish economy.The economy benefited from a rise in consumer spending, construction, and business investment. Since 1987, a key part of economic policy has been Social Partnership, which is a neo-corporatist set of voluntary 'pay pacts' between the Government, employers and trade unions. The 1995 to 2000 period of high economic growth was called the Celtic Tiger, a reference to the tiger economies of East Asia.
GDP growth continued to be relatively robust, with a rate of about 6% in 2001, over 4% in 2004, and 4.7% in 2005. With high growth came high inflation. Prices in Dublin were considerably higher than elsewhere in the country, especially in the property market. However, property prices were falling following the economic recession. At the end of July 2008, the annual rate of inflation was at 4.4% or 3.6% and inflation actually dropped slightly from the previous month.
A 2008 study reported that in terms of GDP per capita, Ireland is ranked as one of the wealthiest countries in the OECD and the EU-27, at 4th in the OECD-28 rankings. However, in terms of GNP per capita, a better measure of national income, Ireland ranks below the OECD average, despite significant growth in recent years, at 10th in the OECD-28 rankings. GDP is significantly greater than GNP due to the large number of multinational firms based in Ireland. A 2005 study by The Economist found Ireland to have the best quality of life in the world.
The positive reports and economic statistics masked several underlying imbalances. The construction sector, which was inherently cyclical in nature, accounted for a significant component of Ireland's GDP. A recent downturn in residential property market sentiment has highlighted the over-exposure of the Irish economy to construction, which now presents a threat to economic growth.
Despite several successive years of economic growth and significant improvements since 2000, Ireland's population is marginally more at risk of poverty than the EU-15 average and 6.8% of the population suffer "consistent poverty".
Economic downturn (2008–2013)
It was the first country in the EU to officially enter a recession related after the 2008 financial crisis, per the Central Statistics Office. At this point, Ireland now had the second-highest level of household debt in the world. The country's credit rating was downgraded to "AA−" by Standard & Poor's ratings agency in August 2010 due to the cost of supporting the banks, which would weaken the Government's financial flexibility over the medium term. It transpired that the cost of recapitalising the banks was greater than expected at that time, and, in response to the mounting costs, the country's credit rating was again downgraded by Standard & Poor's to "A".The global recession has significantly impacted the Irish economy. Economic growth was 4.7% in 2007, but −1.7% in 2008 and −7.1% in 2009. In mid-2010, Ireland looked like it was about to exit recession following growth of 0.3% in Q4 of 2009 and 2.7% in Q1 of 2010. The government forecast a 0.3% expansion. However the economy experienced Q2 negative growth of −1.2%, and in the fourth quarter, the GDP shrunk by 1.6%. Overall, the GDP was reduced by 1% in 2010, making it the third consecutive year of negative growth. On the other hand, Ireland recorded the biggest month-on-month rise for industrial production across the eurozone in 2010, with 7.9% growth in September compared to August, followed by Estonia and Denmark.
File:IMG 187w.jpg|thumb|250px|A housing construction site in Dublin at Sandyford, 2006
The second problem, unacknowledged by management of Irish banks, the financial regulator and the Irish government, is solvency. The question concerning solvency had arisen due to domestic problems in the Irish property market. Irish financial institutions had substantial exposure to property developers in their loan portfolio. In 2008, property developers had an over-supply of property, with much unsold as demand significantly diminished. The employment growth of the past that attracted many immigrants from Eastern Europe and propped up demand for property was replaced by rising unemployment.
Irish property developers speculated billions of Euros in overvalued land parcels such as urban brownfield and greenfield sites. They also speculated in agricultural land which, in 2007, had an average value of €23,600 per acre which is several multiples above the value of equivalent land in other European countries. Lending to builders and developers has grown to such an extent that it equals 28% of all bank lending, or "the approximate value of all public deposits with retail banks. Effectively, the Irish banking system has taken all its shareholders' equity, with a substantial chunk of its depositors' cash on top, and handed it over to builders and property speculators.....By comparison, just before the Japanese bubble burst in late 1989, construction and property development had grown to a little over 25 per cent of bank lending."
Irish banks correctly identify a systematic risk of triggering an even more severe financial crisis in Ireland if they were to call in the loans as they fall due. The loans are subject to terms and conditions, referred to as "covenants". These covenants are being waived in fear of provoking the bankruptcy of many property developers and banks are thought to be "lending some developers further cash to pay their interest bills, which means that they are not classified as 'bad debts' by the banks". Furthermore, the banks' "impairment" provisions are still at very low levels.
This does not appear to be consistent with the real negative changes taking place in property market fundamentals.
On 30 September 2008, the Irish Government declared a guarantee that intends to safeguard the Irish banking system. The Irish National guarantee, backed by taxpayer funds, covers "all deposits, covered bonds, senior debt and dated subordinated debt". In exchange for the bailout, the government did not take preferred equity stakes in the banks nor did they demand that top banking executives' salaries and bonuses be capped, or that board members be replaced.
Despite the Government guarantees to the banks, their shareholder value continued to decline and on 2009-01-15, the Government nationalised Anglo Irish Bank, which had a market capitalisation of less than 2% of its peak in 2007. Subsequent to this, further pressure came on the other two large Irish banks, who on 2009-01-19, had share values fall by between 47 and 50% in one day. As of 11 October 2008, leaked reports of possible actions by the government to artificially prop up the property developers have been revealed.
In contrast, on 7 October 2008, Danske Bank wrote off a substantial sum largely due to property-related losses incurred by its Irish subsidiary – National Irish Bank. The 3.18% charge against the loan book of its Irish operations is the first significant write off to take place and is a modest indication of the extent of the more substantial future charges to be incurred by the over-exposed domestic banks. Asset write-downs by the domestically-owned Irish banks are only now slowly beginning to take place
In November 2010, the Irish government published a National Recovery plan, which aimed to restore order to the public finances and to bring its deficit in line with the EU target of 3% of economic output by 2015. The plan envisaged a budget adjustment of €15 billion over a four-year period. This was front-loaded in 2011, when measures totalling €6 billion took place. Subsequent budgetary adjustments of €3 billion per year were put in place up to 2015, to reduce the government deficit to less than 3% of GDP. VAT would increase to 23% by 2014. A property tax was re-introduced in 2012. This was initially charged in 2012 as a flat rate on all properties and subsequently charged at a level of 0.18% of the estimated market-value of a property from 2013. Domestic water charges are to be introduced in 2015. Expenditure cuts included reductions in public sector pay levels, reductions in the number of public sector employees through early retirement schemes, reduced social welfare payments and reduced health spending.
As a result of increased taxation and decreased government spending the Central Statistics Office reported that the Irish government deficit had decreased from 32.5% of GDP in 2010 to 5.7% of GDP in 2013.
In addition Ireland's unemployment rate fell from a peak of 15.1% in February 2012 to 10.6% in December 2014. The number of people in employment increased by 58,000 in the year to September 2013. On 27 February 2014 the government launched its Action Plan for Jobs 2014, which followed similar plans initiated in 2013 and 2012.